Richmond Finance Society Weekly Newsletter by wbj55044


									     Issue          04                         Richmond, the American International University in London                                                                                                   Feb
20, 2010
    Recent                                                                                                                                                                                    In This
    Events                                                                                                                                                                                    Issue:

                                                                            Richmond Finance
       U.S. News
                                                                                                                                                                                        1. SPECIAL
United States $1 trillion
 shortage for benefits                                                                        Society                                                                                   The Doomed Euro

                                                                              Weekly Newsletter
     Greece Crisis

  European Union’s                                                                                                                                             Omar Elneser
   Involvement in                                                                  The Doomed Euro
  Greece’s Financial        Europe’s single currency was launched in the beginnings of 1999. Out of the     There are just too many conflicts of interest, getting a weighted-
      Downturn                                                                                                                                                                          2. International
                            27 member states of the European Union, 16 make use of the currency while       average rate of inflation and interest rate is not enough to let the more
                            23 countries have their currencies directly pegged to the euro. After the US    developed members run the market place the way they would like to.             Economy
                            dollar, the Euro is the most held international reserve currency and many       Now it has to be considered that a weaker Euro helps tackle
                            respectable economists including Alan Greenspan have discussed the              unemployment, but because of massive spending by governments
                            conceivable possibility of the euro replacing the US dollar as a reserve        inflation is on its way back so it seems that we have a dilemma. A          Greece – From
                            currency. Then the credit crunch happened which was followed by a global        weak Euro favors exporters, while a stronger Euro have others relying       Comedy to Tragedy
      Wall Street           financial crisis and we have seen how Europe is trying to spend its way out     in financial services. In general, things seem to run smoothly when
                            of recession. The needs of each country are distinct, such as the ability to    systemic risk is low and growth is high but in these are the times
                            print their own money and have absolute control of its supply of money. With    when we should measure the currency and its future potential. I
  Stocks potentially        the exception of the UK, all other European countries have a very rigid labor   believe the Euro as a currency seems to be condemned and I would
 crossing into positive     structure which limits the flexibility and economic agility of each country.    not be surprised if before 2010 the Euro and the Dollar reach parity.
                            Undoubtedly, Germany is and always will be a powerhouse, but the                The European ideal is not enough to prevent this from happening.
  territory this week       Germans cannot continue to finance all the holes being opened by poorly         Ideals are pretty, such as the Arab Union, but apart from values there
                            managed countries as shown currently. And this is not only about Greece’s       is reality. In Europe, there are too many barriers such as culture, a
                            debt crisis; it’s much more than that. So many European countries are well      history of wars, language, and economic structures. There is no             3. INVESTMENTS
                            above the debt and deficit levels enforced. What is next? When Germany is       harmonization of labor laws, economic structures, and no country is
                            in need of a weaker Euro because it has been overtaken by China as the          willing to surrender their independence to an Euro institution that has
                            world’s largest exporter; the Greek are in need of loans because their          a high potential for failure. No matter what, stay loyal to the             A Risk Averse
                            economy becomes more and more illiquid and they cannot print money; the         greenback because even if the Chinese try to undermine the                  Approach to
   Upcoming Events          Spanish are unwilling to adapt fair value mark to market accounting practices   currency, it seems that they have no substitute in real terms.
                            so they make it even harder to value assets.                                                                                                                Emerging Markets
  Look out for lectures
 and events organized
    by the society!

     Issue       04                                Richmond, the American International University in London                                                                                                Feb
20, 2010

                                              Greece – From Comedy to Tragedy
                                                                                                                                                                               Cezar Coroblean

              Just when the recession was thought of ending without leaving a single European                 However, according to the FT, Greece might need almost the double of this sum, €
      Union country bankrupt, there was a devastating turn of events. It didn’t come from             53 billion, to be more exact. The country already raised € 60 billion during 2009 to cover its
      Bulgaria, or Romania, not even the badly “hurt” Baltic countries or Ireland. Instead            public deficit, but with the prospect of 2010 being worse than 2009 how much will the
      Greece, a member of the EU since 1981 and of the Euro Zone since 2001, found itself             investors be willing to lend the country?
      in the situation of having a budget deficit of 12.7%, double the initial forecast for 2009
      and nearly four times over the 3 percent limit foreseen by European Union rules. The                   On the 25th of January, Greece issued a total of € 5 billion in five-year fix rate
      first concerns regarding Greece’s public deficit were reported after last year’s close          governmental bonds, but the demand for the securities was of nearly € 20 billion. The main
      default of Dubai (the emirate was saved only by a last minute $10 billion loan from the         reason for the high interest that investors show in Greek bonds is the high risk premium
      neighbour emirate Abu-Dhabi). Wolfgang Munchau, co-founder and president of Euro                that the country is paying. Currently Greece is paying nearly two per cent more in interest
      intelligence, was one of the first high profile analysts to say that Greece might find itself   on its debt than Germany or other Euro Zone members. The five-year bonds were offering
      in the same position as Dubai, but the main difference would be that the Brussels               a 6.2% annual yield, 0.4% more than the bonds issues during 2009 and almost 4% more
      officials might not act as the country’s saving angels.                                         than the five-year German bonds. The two-year bonds offer an annual yield of 4.34%,
                                                                                                      whereas the ten-year bonds have a coupon of 6.17%, almost 1.5% more than the Irish
            Greece is not the only EU member with a high public deficit and if the country            bonds, which offer the second largest yield in the Euro Zone.
      would become bankrupt the EU might have second thoughts before bailing. This might
      create an “a priori” belief and other members that might get in Greek’s situation will                After the success of the first issuance of bonds, Greek officials began talks with
      expect to be bailed. Spain, EU’s fourth largest economy, is probably the best example.          Chinese official and investor for the sale of bonds worth € 25 billion in the Asian country.
      With an unemployment rate of nearly 20% and a public deficit of 11.4% for 2009, bailing         However, just as Bearn Stearns failed to save itself in China, so did Greece. The Chinese
      out Spain might be more than the EU can chew. On comparison, Greece’s economy is                investors showed very little interest in the Greek bonds probably because on the long run
      ranked as being the 11th largest in the union. The difference between the two countries         the euro/yuan exchange rate is expected to decrease and it will offset the gain on the
      becomes easier to observe when absolute values are compared. As of 2008, Spain’s                securities.
      GDP amounted to €1,088 billion whereas Greece had a GDP of €240 billion.
            At a 12.7% public deficit rate and a GDP of € 230 billion for 2009 (assuming that               For now, Greece managed to raise € 8 billion that should be enough the keep the
      the Greek economy decreased by 4.1%, the EU overall decreases in GDP for 2009) the              country “running” until May when it is set to pay back some of their long-term debt.
      country urgently needs at least € 30 billion.                                                   However, it will be interesting to follow up the evolution of the Greek situation and hope that
                                                                                                      Spain will not end in the same situation.

                                                                                         www.richm ond. ac.u k                                                                                              2

 Issue   04                                                    Richmond, the American International University in London
Feb 20, 2010

         A Risk Averse Approach to                                                                       Links to Additional Current
             Emerging Markets                                                                            Events and Financial News
            As relatively recent trends have shown, the greatest potential for earning high
     returns quickly is to invest in the rapidly growing economies of emerging markets. The
     continuous expansion of production and demand for stock in countries such as China,
     India, and Brazil has created a great opportunity for international investors but has also
                                                                                                     1. The past two weeks have seen a positive trend for the
     caused a significant increase in stock prices in those economies.                               United States economy but there are substantial international
                                                                                                     challenges ahead this week that could potentially disrupt the
            Investing large sums of money in these emerging economies has extremely rich
     potential but also exposes stock holders to immense amounts of risk. Therefore, traders         momentum.
     have been looking to alternative methods of involvement that still create an opportunity
     for large gains while also providing stronger security against risk during times of
     economic pitfalls. An increasingly popular solution to this problem is to invest in  
     companies with significant activity in emerging markets. Buying shares in large
     multinational corporations based in developed countries who have lucrative and growing
     operations and sales in countries such as China, India and Brazil is a way for
     shareholders to participate in the emerging markets economy while still shielding               2. The United Kingdom’s opposition Conservative Party plans
     themselves from the high cost of foreign stock prices and high volatility of those stocks.      to give discounts on stakes of U.K. banks sold to taxpayers if
            Another advantage of investing in the multinational corporations is that energy          elected.
     and commodity demands in these developing countries are also increasing. Therefore,
     the multinational corporations are experiencing increasing growth in a broad variety of
     industries and countries in addition to the developing ones due to their increased               8.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews
     demand for imports. Within the next 20 years it is forecasted that over one billion people
     will make up the middle class in developing countries around the world, which means
     that labor force and sales will grow in proportion to the increasing population.

           Emerging economies also currently hold over 90 percent of the world’s oil supply,         3. The Dutch coalition collapses due to divisions within cabinet
     along with a large spectrum of other natural resources. As these economies become
     more established they will rely less on the developed countries and will decrease the           regarding troops presence in Afghanistan and therefore has plans
     demand for their products. Although this radical decrease in demand for developed               to pull all troops out in August.
     nation’s tangible goods and financial assets won’t happen over night it is still beneficial
     to consider investing in these emerging markets while it is still economical for foreign
     investors to do so.                                                                   

                                                                              Lauren Schultz

     Issue     04                                           Richmond, the American International University in London                                                                Feb
20, 2010

                                                                         Meet the Finance Team*!
                                                                                                                                            Upcoming Events!
                  A Look Back at Last Week
             We held our first informational meeting in                                                                           Monday, February 21, 2010 Dr. Cohen will
             the Atlantic House Common Room where                                                                                   be giving a guest lecture to any and all
               we discussed goals and ideas for the                                                      No Picture              students who are interested. Please refer to
             coming semester. We also spoke to a few                                                     Available                the Student Union’s Academic Committee
                 of our upcoming speakers for this                                                                                             for more details.
             semester to finalize dates that they will be
                          visiting Richmond.                                                                                      We welcome you all to join us and feel free
                                                                              Omar Elneser             Cezar Coroblean           to submit a piece of work or article you have
                                                                                 Chair                   Vice -Chair                 written to the Finance Society Weekly
                                                                                                                                  Newsletter if you would like to be published

                                                              Grese Rexhepi            Diana Simion               Pascal Kraus
                                                                Treasurer                Secretary                 PR Officer

                                                                                                                                              Joke of the Week:
                                                                                                                                   “Economists were created to make
                                                                                                                                   meteorologists look good.”
                                                                                      Lauren Schultz
                                                                                        Chief Editor

                                                                 *Mentor: Dr. Ivan Cohen, PhD.
                                                                 Associate Professor in Finance and Economics


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